Investment farms are becoming increasingly popular and there are several key factors that you need to know to invest in farmland and consequently get good returns. Farm investment into land and the operating business gives investors the best straight forward link to the returns available from agriculture. The dairy industry and high performance sheep and beef farms provide the most direct gains from food demand trends in industries that are globally competitive and have steady industry structures and well proven cash flows.
Some of the options you have to invest directly into the agricultural business include owning a farm and leasing it out. This gives investors exposure to changes in land values. You will see as returns and profits from farming increase so will the value of the land and rent provides cash returns. You may find however find tension between the owner of the land wanting to manage the farm in a way that will ensure its long term value will be guaranteed and increase, where as the tenant of the farm land may want to manage the land in a way that will provide short term returns. You also have the option of investing in a share milking company or a contracting company as this can provide you with strong cash returns.
Investing in an operating farm business via buying the farm outright or through being involved in a syndicate will give an investor direct exposure to commodity returns, land value increases, increasing farm productivity and operating efficiencies. An example of this is the dairy giant Fonterra as their shares make up 10-15% of the assets which gives additional exposure to returns from this large company. Capital gains in this scenario happen through the appreciation of farmland’s value and this can be strengthened through development and productivity gains. Through this investment option however the revenues can be repeated due to climate effects, and changes in commodity prices and exchange rates. Although this can be avoided by buying the right investment farm land and using a conservative debt structure and input costs usually change together with the commodity prices.
You can also invest in listed agricultural stocks as this provides a liquid exposure to agricultural returns. Investing in listed stocks directly will lead to the price movement being magnified. Investing in futures is another option and this provides exposure to movements in commodity prices. Agricultural commodity prices usually react over the long-term so this is a good long term option. Investment farms are a compelling investment opportunity. Food and soft commodity prices are experiencing record highs in correlation with the global population growth and investing in this industry will see you with good returns as investment opportunities increase.